Starting in March 2020, Congress passed several laws, including the CARES Act, to provide employers with tax relief in response to the economic burden brought on by the COVID-19 pandemic. Provisions in these laws established the paid sick and family leave credits, the Employee Retention Credit (ERC), and payroll tax deferrals. The Internal Revenue Service (IRS) implemented these provisions while facing delays caused by facility closures and other challenges. As new laws were enacted, IRS continued to revise employment tax returns and guidance.
A review by the Government Accountability Office (GAO) has found that leave credits and ERCs for 2020 totaled about $20.7 billion. Payroll tax deferrals totaled about $123.6 billion. Preliminary data indicate 2021 usage of leave credits and ERCs likely exceed 2020 usage.
Several of the top industry sectors claiming leave credits and ERCs were sectors most affected by the pandemic that GAO identified in previous work. For example, Manufacturing claimed the second highest amounts of leave credit dollars (about 13 percent) and the Accommodation and Food Services sector claimed the highest amount of ERC dollars (about 15 percent).
GAO found that IRS took some steps to identify and plan for compliance risks associated with the leave credits and the ERC. As IRS continues to plan for examinations of both credits—which expired in 2021 but will be subject to examination for several years after filing—GAO found IRS could strengthen these efforts by expanding its use of selected project management practices. For example, IRS developed objectives but the objectives did not evolve to reflect statutory changes made after the CARES Act, are not measurable, and do not include criteria to measure success.
IRS began creating new processes to research and address compliance risks associated with tax credits claimed on adjusted returns and employers who claimed multiple credits with wages that are restricted from use for more than one type of credit. However, the government watchdog found that IRS has not documented how it developed those processes or how it would implement them in practice.
In preliminary data, GAO found 337 filings, totaling $100 million, from employers that were established in April 2020 or later, but then stopped filing employment tax returns. IRS screening filters flagged more than 65 percent of these filers for review. However, those controls may still overlook ineligible entities because they do not consider certain factors, such as refund amounts and employer establishment dates.
GAO is making five recommendations including that IRS develop a compliance plan consistent with project management principles, document compliance processes for adjusted returns and tax credits using restricted wages, and identify ineligible entities. IRS agreed with two of the recommendations and disagreed with three. IRS said its current processes are sufficient. GAO maintains that these recommendations remain warranted.